Nutriband Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited quarterly report covers the three months ended April 30, 2019, Nutriband’s fiscal first quarter. After acquiring 4P Therapeutics in August 2018, the company’s principal focus became developing preclinical transdermal pharmaceutical products, including an abuse-deterrent fentanyl patch. Its prior consumer-patch business continues to generate some sales internationally.
Financial results and liquidity
| Metric | Three months ended April 30, 2019 | Comparable 2018 period |
|---|---|---|
| Revenue | $193,590 | $0 |
| Cost of revenue | $198,794 | $0 |
| Gross profit (loss) | $(5,204) | Not applicable |
| Operating loss | $(573,161) | $(448,098) |
| Net loss | $(573,353), or $(0.03) per share | $(448,098), or $(0.02) per share |
| Net cash used in operating activities | $272,553 | $27,441 |
- Revenue comprised $142,450 from consumer product sales to the South Korean distributor for preliminary marketing and $51,140 from research and development services. The filing reports $142,450 of revenue outside the United States and $51,140 in the United States.
- Cash and cash equivalents were $201,848 at April 30, down from $474,653 at January 31, 2019. Current assets were $315,205 and current liabilities were $435,430, a working-capital deficiency of $120,225.
- Current liabilities included a $40,000 interest-free note payable due on demand and a $5,082 operating lease liability. The company reported no financing cash flow in the quarter and no investing cash flow.
- Total assets were $2,519,137 and stockholders’ equity was $2,083,707 at April 30. Goodwill was $1,719,235.
Material changes versus the prior period
- Revenue rose from zero, but the comparison is not fully like-for-like: 2018 results preceded the 4P acquisition, and the current quarter’s revenue included both 4P services and consumer-product sales.
- Net loss increased by $125,255. Selling, general and administrative expenses rose to $567,957 from $448,098, primarily due to higher legal and payroll expenses. Current-period stock-based compensation was $252,700.
- Operating cash use increased substantially from $27,441 to $272,553. The filing attributes current-period cash movements in part to customer-deposit reductions and increased accounts receivable, partly offset by higher accounts payable and accrued expenses.
- The largest 4P services customer reduced activity, leaving 4P revenue of $51,140 against related cost of revenue of $107,326. Consumer-product cost of revenue was $91,468.
Outlook, risks, contingencies and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern for at least one year from issuance. The company needs substantial additional funding; management says it lacks funds to develop its lead product and may seek equity financing, a joint venture, or a strategic alliance. Financing may be unavailable or dilutive, and failure to raise funds could prevent continued operations.
- Drug development, clinical trials, and FDA approval are required before the company can market its pharmaceutical products in the United States; approval and timing are uncertain. The South Korean distributor had not obtained regulatory approval for retail sales, and the company did not expect significant revenue from it during the year ending January 31, 2020.
- Management reported a significant decline in revenue from 4P’s largest customer. The services are not supported by long-term contracts, and the company warns that insufficient revenue to cover fixed costs could continue to produce negative gross margins.
- The company is appealing a court order dismissing its complaint with prejudice in litigation concerning its attempted rescission of the Advanced Health Brands acquisition. The court directed the defendants to assign six patents to the company. One defendant’s 200,000 returned shares had been cancelled.
- On May 24, 2019, the company designated Series A convertible preferred stock and agreed with three officers to exchange 2.5 million common shares for an equal number of preferred shares, subject to the stated conditions. Each preferred share generally converts into one common share and votes and receives dividends on an as-if-converted basis.
- Disclosure controls and procedures were deemed ineffective. Management cited material weaknesses involving lack of segregation of duties and qualified accounting personnel, reliance on outside consultants, and said financial constraints could prevent timely remediation.
- No quantitative market-risk disclosure was provided; management reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Available cash, operating cash burn, near-term funding needs, and the company’s ability to obtain financing on acceptable terms.
- Whether South Korean regulatory approval is obtained and whether distributor purchases translate into recurring sales.
- Customer concentration and the sustainability and profitability of 4P’s contract-service revenue.
- Development milestones, clinical-trial funding, and the pathway and timing for FDA approval of the product pipeline.
- Developments in the Advanced Health Brands litigation and the status and ownership of the six patents.
- Terms and implementation of the preferred-stock exchange, and progress in addressing disclosed internal-control weaknesses.